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Something Ventured:
October 29th

Insight For BC Technology Entrepreneurs

By Brent Holliday

Decisions, Decisions

"Different strokes for different folks,
We got to live together,
Ahhhhh, everyday people "
-Sly & the Family Stone, Everyday People

Last month, Red Herring ran a cover story called Why Companies Fail. It was written by Geoffrey Moore, the well-known writer/venture capitalist (a great combination, don't you think?) who now toils for Mohr Davidow Partners in Menlo Park, CA. He surmised that technology companies fail for four distinct reasons. 1) They fail to adapt to changes and die a slow death 2) They fail to focus on a niche strategy to win them the first few key customers and never get over the "chasm" 3) They swing for the fences and go big but miss the timing of the market (think Iridium, 3DO) 4) They fall into a market dead zone because the product value is usurped by something slightly better (or better marketed). I won't go into it in detail, you can read it for yourself right here.

In each case that Geoffrey makes for companies failing, I can't help but think that a sharp management team could have avoided any of the traps. In fact, what would be very useful is a study of technology companies that have been moderately or hugely successful, focusing on the style of management and their critical decisions. In my mind, that's what it all boils down to: How do the people, whether they be CEO or product manager or junior programmer, make decisions?

We say it all the time. It's become cliché. Good management wins. Well, in reality, it's the decisions that management makes and the culture that they create for all of the people in the company to make good decisions. Here's why I think any company fails: people are not born with the ability to make good decisions, it is a learned ability. And it is VERY hard to learn because experience is your best teacher. The best entrepreneurs are the ones that learn a lot and learn it fast. Luck always plays a part of success and failure, but good luck or bad luck comes from the dynamic environment that your company is in. Adapting to both types of luck still requires good decisions. It all comes back to the people.

I heard a saying once that goes something like this: "Starting a company is hard. Very hard. If it was easy, everyone would do it and there would be no money in it." Without getting too philosophical, this is what drives entrepreneurialism. If I can start something unique and I can be a success, I will be rewarded. But there is a great chance I will fail.

The new knowledge economy is putting even more pressure on people and what they have learned. You have to not only be smarter to come up with a unique offering to a customer, but you have to be able to execute your plan better. And as we all know, you have to do it faster. Here's the rub: You need money to do any of this. So, the financiers need to believe that you and your team have what it takes. I'll come back to this in a minute...

I was just in Seattle visiting my friends at Onvia.com, a fast-growing company born in and still a part of Vancouver. As I was dwelling on the topic of this week's column, I thought about Glenn Ballman and his original cast of people. MegaDepot.com was created in early 1997 as a Canadian alternative to the US e-tailing sites that were selling software, computers and electronics. I actually bought a few items in the early days because the cost of shipping within Canada was a lot less than having it come across the border and they touted that they could get the item to you on the same day. In fact, even today, many of the US sites don't ship to Canada at all. When I told Rob that I bought some items, he laughed and said that back then it was me and about three others that purchased anything. They started out selling a few hundred dollars a month worth of merchandise!

To quickly summarize their transition from the early days to the company that I visited this week with 200 employees in Seattle and another 40 in Vancouver: they came up with a unique offering. Glenn, Rob and a consultant (now VP, Business Development) named Kristen Hamilton came up with the idea that small businesses need a trusted source of information and products/services that help them grow as painlessly as possible. The focus of the company changed to that of a virtual operations centre for the early stage entrepreneur. Saving time is the mantra of the company. They now have 150,000 small business members using their service. They want to be at a million in a year. Paradoxically, the company that serves small business (defined as less than a hundred people) is now 250 people itself.

The idea and its early execution has earned them $48 M US in venture capital in 10 months. And do you know who lead the first round of funding in February? Mohr Davidow and that Geoffrey Moore guy.

What do you suppose Glenn and his gang really knew about this business 18 months ago, when they started the long trek to find money and build the newly named onvia.com? What was their experience? What had they learned?

I spoke to a financier who met Glenn and listened to his pitch 18 months ago. He said that like any young idealistic Net entrepreneur, Glenn was on a steady diet of Kraft Dinner and coffee and looked like he hadn't slept in a month. The pitch, apparently, was awful. Glenn was trying to explain a market that didn't exist and how his team was going to capture it. The idea wasn't bad, it was just that the delivery needed some work. OK, a lot of work. A few other financiers had listened to the same pitch and had passed on Glenn. Presumably, they looked at what he had learned and figured it was not enough.

This financier did back Glenn. He saw a person that was not afraid to learn. He saw someone who had been on a huge learning curve, while struggling with MegaDepot.com. He saw a person that would take advice and use it constructively. He saw a person that would not personalize criticism. He saw a team on the same learning curve and thought that peppered with a few more people with other types of experience, this company had a shot. That's why this guy backed Glenn.

I asked Glenn and his team why Onvia.com was able to ramp as quickly as it has. The response was what triggered my thesis. Good decisions. Every day, whether you be the CEO or any level of employee in a team, you will be making decisions. If your company is going to avoid one of the four pits of failure, then the decisions must be good ones.

One of the first points of decision made by all of us every day is how to use our time effectively. Prioritization of your time and energy, based on the direction of the company and your particular role in it, is actually a set of decisions. Instinctively knowing what should go first is a learning process. Procrastination of things that are harder but higher priority will help your company fail. Wasting time on irrelevant or lower priority tasks will also help your company fail. TCI, the largest US cable company bought recently by AT&T, had a mantra that the employees used to make decisions. It came from the top guy, John Malone. Every employee knew it and lived by it. At a decision point, ask yourself, "Will this make money for TCI?" Personally, I think that it was the wrong question (How about, "Will this make my customer more loyal?"), but I use it to illustrate a point. The company needs to create a set of rules that help everyone make decisions. Set up the sidelines and keep everyone running for the end zone. It's all part of the culture.

Good decisions lead to effective execution. When I asked Glenn if he was worried about competition. He replied that he always worried. But in the end, he said that execution of the plan that makes the most customers happy will lead to success. By actively listening to customer needs and responding quickly, Onvia has kept a leg up. In a company of five people, you can respond quickly. In a company of 250, many of the decisions are made and executed without Glenn knowing. If the people have learned how to make decisions in the context of the company, they will succeed.

Decisions don't always turn out right. In the absence of a time machine, we never really know how it might have turned out differently. Which leads to another point about people. Dwelling on past mistakes will kill you and hurt the company. Pick yourself up, dust off your jeans and get back in the game. But most importantly, understand what went wrong and learn from it. Geoffrey Moore says that the difference between losing and failing is that a loser is a company or a person that never learns from their mistakes. A failure is someone that has made a bad decision. We can recover from a few bad decisions in most cases.

There are always agonizing decisions to be made. The big ones. In my experience, the quicker a big decision is made the better off you will be. You may be trading off the ability to acquire more or better information to help you decide, but overthinking the decision will kill you. That's the intangible "gut" instinct. The "gut" is the toughest thing to assess in a person. They either have a good "gut" or no "gut".

Whether you are hiring people into a fast-growing company or looking to back people financially in a start-up, you need to ask yourself some key questions: What kind of decisions will these people make? What have they learned? How fast will they learn? What is their potential for learning more? Will they bounce back from bad decisions? Ultimately, it will come down to your "gut" instinct.

Companies succeed or fail based on the people. Make no mistake. The rate-limiting step to becoming a big company is the step of hiring "good" people. Onvia has hired hundreds of people in the last year. Glenn has learned a ton. He is much more polished and delivers a great pitch now. The company still has huge challenges ahead of it. Will they succeed? I guess it really depends on whether or not their people continue to make good decisions.

Random Thoughts

- Internet Company Fast Facts from the Internet World top 50 pure Internet companies (top 50 in revenue) for 1999.

  • 18 of 50 (36%) turn a profit
  • Median revenue = US $108 M
  • Median market capitalization = US $1.9 B (with a B)
  • Average age of CEO = 42.6 years (These are all public companies remember. Founders ages are considerably less)
  • Least paid CEO of the Top 50 is Jeff Bezos, Amazon.com at $81,000 per year.
  • Two women CEOs in Top 50 - Marg Whitman of eBay and Ellen Hancock of Exodus
  • Average ownership of company today when CEO is also a founder: 14%; when CEO is a hired gun, brought on just before or since IPO: 1%

- Locally, Pivotal went on a wild ride this week, zipping up to $36 US on Tuesday and falling back to $26 on Wednesday from $21 on Monday. If the Pivotal employees need barf bags from these gyrations, just call the PMC-Sierra guys for a lesson in how volatile your stock can be. At its peak, Pivotal was being valued by the market at over $700 M US or a $1B CDN (with a B). It's now at $500M US. All of this value for a run rate of $30M US in revenue. To compare apples to apples, look at Onyx software, its Seattle rival with a market cap of $373 M US on a $40M US run rate. Hmmmmm. Well, the Pivotal share price activity is no doubt in response to the great announcement with Microsoft and Cisco, but the real reason may be in the Nortel purchase of Clarify. Nortel paid what appears to be a >100% premium for Clarify when it offered $2.1 B US last week, when Clarify was trading at $900 M US on a run rate of $200 M US in revenue. So, assuming that someone wants to buy Pivotal take the Monday market cap of Pivotal at $360 M and more than double it. That means that Pivotal is a bargain today. Uh, yeah. If you are an insider in Pivotal, then you try not to pay attention because February is a long way off still.

- I had some feedback on my article about Investors Saying NO (a month ago). People were generally happy to see some honesty about the rejection process. I can't stress enough how hard it is to find the right capital for your business. The education process is huge. Here is an article that is excerpted from a book about Vermeer Technologies (creator of Front Page, bought for $130 M and assimilated by the Mother Ship in early 1996). Read it and learn about the humbling experience of raising money. http://www.fastcompany.com

- From the "I Told You So" Files: Remember my hair-brained plan to scan bar codes of merchandise with your cell phone (or wireless PDA) and then purchase the good and leave the store? You scoffed. You wrinkled your nose. Well consider exhibit A, Barpoint.com. It may be an OTC stock scam, but at least they have a good idea, I think.

What Do You Think? Talk Back To Brent Holliday

Something Ventured is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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